How Utility Stocks’ Returns Affect Implied Volatility
Utility stocks with high implied volatilities
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In the past five days, NRG Energy has risen 3%, while XLU has fallen 1.1%. The S&P 500 Index (SPY) (QQQ) (SPX-INDEX) rose 0.8%, and the Dow Jones Industrial Average (DIA) (DJIA-INDEX) rose 0.3% in the same period. The utility sector accounts for ~3.1% of the S&P 500 Index. However, fundamental drivers that impact utilities could also impact the Dow Jones Industrial Average Index.
The above chart shows the one-year and trailing-five-day returns of the stocks we identified in the previous part as having high and low implied volatilities. High implied volatility stocks saw sharper movements compared to low implied volatility stocks.
Among high implied volatility stocks, NRG Energy has risen the most in the last five days, while Scana (SCG) has fallen the most. On March 30, 2017, Fitch placed Scana and its subsidiaries under a negative rating watch. On the same day, the stock fell 0.2%. Concerns surrounding Westinghouse Electric Company’s bankruptcy have fueled uncertainty surrounding its construction of nuclear power reactors for SCG.
In the last four quarters, Scana’s revenue has risen 10.3%, while its adjusted operating profit has risen 18.8%. Its operating profit margin is 27.3%.
Returns of utility stocks with low implied volatilities
American Water Works Company (AWK) has risen the most in the last five days and in the past year among low implied volatility utility stocks. In the last four quarters, its revenue has risen 2.5%, while its adjusted operating profit has risen 6.3%. Its operating profit margin is 32.4%.
In the next part of this series, we’ll look at utility stocks with the highest short-interest-to-equity float ratios. High short interest in a stock can cause its implied volatility to rise.